Policies in Relational Contracts

Daniel Barron and Michael Powell

American Economic Journal: Microeconomics, 2019, vol. 11, issue 2, 228-49

Abstract: We consider how a firm's policies constrain its relational contracts. A policy is a sequence of decisions made by a principal; each decision determines how agents' efforts affect their outputs. We consider surplus-maximizing policies in a flexible dynamic moral hazard problem between a principal and several agents with unrestricted vertical transfers and no commitment. If agents cannot coordinate to punish the principal following a deviation, then the principal might optimally implement dynamically inefficient, history-dependent policies to credibly reward high-performing agents. We develop conditions under which such backward-looking policies are surplus-maximizing and illustrate how they influence promotions, hiring, and performance.

JEL-codes: D21 D82 D86 M51 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/mic.20170181
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://www.aeaweb.org/doi/10.1257/mic.20170181 (application/pdf)
https://www.aeaweb.org/articles/attachments?retrie ... SNEdNmlJ4xvG2qzrSJcQ (application/pdf)
https://www.aeaweb.org/articles/attachments?retrie ... d_Le4BaiSfJufES8Ulnb (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aejmic:v:11:y:2019:i:2:p:228-49

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

American Economic Journal: Microeconomics is currently edited by Johannes Hörner

More articles in American Economic Journal: Microeconomics from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().